(Bloomberg) — Traders pared bets that the Bank of England will ease monetary policy in the coming months after data showed services sector inflation remained higher than expected in May.
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Money markets are now pricing in a 30% chance of a cut in August, compared to 45% before the data was released. There’s one quarter-point cut fully priced for this year, by November, with a 60% chance of a second reduction — down from 80% on Tuesday.
Although the headline inflation number slowed to the central bank’s target for the first time in almost three years, traders are betting that the closely-watched services sector number will keep policymakers cautious. Expectations for BOE rate cuts have fallen sharply since the start of the year, when the market was betting on as many as six reductions.
The central bank is widely expected to keep rates on hold at 5.25% when it meets on Thursday.
“The September BOE meeting looks like the earliest opportunity for a cut,” said Tim Graf, head of EMEA macro strategy at State Street Global Markets. The inflation report “still likely leaves the Monetary Policy Committee reluctant to cut until further softening is confirmed.”
The UK Consumer Prices Index rose 2% from a year ago in May, down from 2.3% the month before and in line with economist expectations. Inflation in the services sector rose 5.7%. Economists had expected a sharper slowdown to 5.5%.
The yield on two-year gilts — among the most sensitive to changes in monetary policy — rose five basis points from a two-month low to 4.19%. The pound strengthened as much as 0.2% against the dollar to $1.2730.
Economic data releases have been a major driver for UK rate-cut bets as policymakers have refrained from making public remarks ahead of a general election due to take place on July 4.
–With assistance from Naomi Tajitsu and James Hirai.
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